Does severe air pollution affect audit judgement? Spoiler alert, it does; but how?
Using data from a sample period from 2003, when the first nationwide air quality data is available, to 2014 researchers Xingtai Baoding, Xiaofeng Peng and Jianguang Zeng from the Toronto, Toledo and Chongqing universities respectively show that where air quality was worse modified audit opinions (MAOs) were fewer.
Referencing earlier work that shows a relationship between air pollution and mood they go on to show in their piece that poor audit work is the product of two particular problems; productivity reduction and cognitive bias.
From an investor perspective I’m not sure there’s much here for us as most of the problems relate to small client firms and smaller audit firms operating within China: not my preferred investment habitat nor that of most institutional investors.
One important observation is of general interest though. The experience level [Is that a euphemism for age? Ed.] of the auditors is an important variable. The more experienced the personnel involved the less likely the audit will be compromised by the atmospheric conditions.
Perhaps that should be a check-list item for future company visits? Not only should one take note of which firm audits a company’s accounts (and their compensation, be especially wary when payments are anomalously low) but inquire also in future the age of the audit team-leader?
You can access the paper in full via the following link Does Severe Air Pollution Affect Audit Judgment?
Happy Sunday.